prudent man rule

prudent man rule

n. the requirement that a trustee, investment manager of pension funds, treasurer of a city or county, or any fiduciary (a trusted agent) must only invest funds entrusted to him/her as would a person of prudence, i.e. with discretion, care and intelligence. Thus solid "blue chip" securities, secured loans, federally guaranteed mortgages, treasury certificates, and other conservative investments providing a reasonable return are within the prudent man rule. Some states have statutes which list the types of investments allowable under the rule. Unfortunately, the rule is subjective, and some financial managers have put funds into speculative investments to achieve higher rates of return, which has resulted in bankruptcy and disaster as in the case of Orange County, California (1994). (See: fiduciary, trustee)

The contemporary application and interpretation of prudent man rule applies to all directors, whether paid or unpaid, and regardless of the legal nature, size or type of business enterprise, its products and its commercial transactions.

Some of the important aspects of ERISA included a revision of the Prudent Man Rule, rules affecting funding, a rule allowing fiduciaries to delegate fiduciary responsibilities, and the requirement that all pension funds develop and maintain an investment policy statement.

Generalizations were articulated and efforts were made to provide guidance to trustees, with the result that over time the prudent man rule lost mulch of its generality and adaptability as applied in most states.

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